BILL ANALYSIS Ó
SB 1226
Page 1
Date of Hearing: June 28, 2016
ASSEMBLY COMMITTEE ON HUMAN SERVICES
Susan Bonilla, Chair
SB
1226 (Beall) - As Amended March 28, 2016
SENATE VOTE: 39-0
SUBJECT: Regional centers: audits and reviews
SUMMARY: Requires regional centers to submit, and the
Department of Developmental Services (DDS) to review and report
on, all vendor independent audit reports.
Specifically, this bill:
1)Requires a regional center to submit copies of all independent
audit reports received to the DDS for review.
2)Requires DDS to analyze independent audit reports submitted by
regional centers to determine if they are effective in
preventing fraud and improving accounting practices among
entities that receive regional center funding and further
requires DDS to report its findings to the Legislature on a
biannual basis, as specified.
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EXISTING LAW:
1)Establishes the Lanterman Developmental Disabilities Services
Act (Lanterman Act), providing an entitlement to services for
individuals with developmental disabilities.
(WIC 4500 et seq.)
2)Grants all individuals with developmental disabilities, among
all other rights and responsibilities established for any
individual by the United States Constitution and laws and the
California Constitution and laws, a number of rights,
including the right to treatment and habilitation services and
supports in the least restrictive environment. (WIC 4502)
3)Establishes a system of nonprofit regional centers throughout
the state to identify needs and coordinate services for
eligible individuals with developmental disabilities and
requires DDS to contract with regional centers to provide case
management services and arrange for or purchase services that
meet the needs of individuals with developmental disabilities,
as defined. (WIC 4620 et seq.)
4)Requires the development of an individual program plan (IPP)
for each regional center consumer, which specifies services to
be provided to the consumer, based on his or her
individualized needs determination and preferences, and
defines that planning process as the vehicle to ensure that
services and supports are customized to meet the needs of
consumers who are served by regional centers. (WIC 4512)
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5)Creates a process by which regional centers may "vendorize"
service providers, thereby providing a path to contract for
services with that provider and ensuring maximum flexibility
and availability of appropriate services and support for
persons with developmental disabilities. (WIC 4648)
6)Authorizes regional centers to solicit an individual or agency
through a request for proposals or other means to provide
needed services or supports not presently available, provided
it is necessary to expand the availability of needed services
of good quality. (WIC 4648(e)(1))
7)Requires regional centers to provide the consumer, his or her
parent, legal guardian, or other appropriate authorized
representative, as specified, at least annually, a statement
of services and supports the regional center purchased, for
the purpose of ensuring that the services are delivered. (WIC
4648(h))
8)Authorizes DDS and regional centers to monitor services and
supports purchased for regional center consumers without prior
notice, as specified, and authorizes DDS to conduct fiscal
reviews and audits of service providers' records. (WIC
4648.1(a))
9)Requires that DDS and regional center staff involved in
monitoring or auditing services provided to regional center
consumers be granted access to a provider's grounds,
buildings, service program, and all related records and
documentation, as specified. (WIC 4648.1(b))
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10)Requires that an entity receiving payments from one or more
regional centers contract with an independent accounting
firm for an audit or review of its financial statements
subject to all of the following:
a) When the amount received from the regional center or
regional centers during the entity's fiscal year is more
than or equal to $500,000 but less than $2 million, the
entity shall obtain an independent review report of its
financial statements for the period. This includes work
activity program providers receiving less than $500,000,
as specified; and
b) When the amount received from the regional center or
regional centers during the entity's fiscal year is equal
to or more than $2 million, the entity shall obtain an
independent audit of its financial statements for the
period. (WIC 4652.5 (a)(1))
11)Excludes certain payment types, as specified, from
consideration and exempts state and local governmental
agencies, the UC and CSU university systems from the audit and
review requirements. (WIC 4652.5(a)(2) and (a)(3))
12)Requires vendors to provide copies of the independent audit
or review reports, and accompanying management letters, to the
vendoring regional center within nine months of the end of the
vendor's fiscal year. (WIC 4652.5(b))
13)Requires regional centers to review the audit and review
reports and require resolution of issues identified in the
report that have an impact on regional center services, and to
take appropriate action, which may entail termination of
vendorization, for lack of adequate resolution of issues.
(WIC 4652.5(c))
14)Requires regional centers to notify DDS of all qualified
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opinion reports or reports noting significant issues that
directly or indirectly impact regional center services within
30 days after receipt, and requires the notification to
include a plan for resolution of issues. (WIC 4652.5 (d))
15)Specifies that an independent review of financial statements
must be performed by an independent accounting firm and
requires the review to include, at a minimum:
a) An inquiry as to the entity's accounting principles and
practices and methods used in applying them;
b) An inquiry as to the entity's procedures for recording,
classifying, and summarizing transactions and accumulating
information;
c) Analytical procedures designed to identify relationships
or items that appear to be unusual;
d) An inquiry about budgetary actions taken at meetings of
the board of directors or other comparable meetings;
e) An inquiry about whether the financial statements have
been properly prepared in conformity with generally
accepted accounting principles and whether any events
subsequent to the date of the financial statements would
have a material effect on the statements under review; and
f) Working papers prepared in connection with a review of
financial statements describing the items covered as well
as any unusual items, including their disposition. (WIC
4652.5(e))
16)Specifies that the independent review report shall cover, at
a minimum, all of the following:
a) Certification that the review was performed in
accordance with standards established by the American
Institute of Certified Public Accountants;
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b) Certification that the statements are the
representations of management;
c) Certification that the review consisted of inquiries
and analytical procedures that are lesser in scope than
those of an audit; and
d) Certification that the accountant is not aware of any
material modifications that need to be made to the
statements for them to be in conformity with generally
accepted accounting principles. (WIC 4652.5(f))
17)Prohibits DDS from considering requests for adjustments to
rates submitted by an entity receiving regional center
payments solely to fund either anticipated or unanticipated
changes required for an entity to comply with the audit or
review requirements, as specified. (WIC 4652.5(g))
18)Requires every charitable corporation, unincorporated
association, and trustee required to file reports with the
Attorney General, as defined, that receives or accrues in any
fiscal year gross revenue of two million dollars ($2,000,000)
or more, exclusive of grants from, and contracts for services
with, governmental entities for which the governmental entity
requires an accounting of the funds received, to obtain an
annual financial audit, as defined, and requires the audited
financial statements to be available for public inspection no
later than nine months after the close of the fiscal year to
which the statements relate, as defined. (GOV 12586 (e)(1))
19)Requires a regional center to audit records of service
providers, as specified, to the extent the regional center
determines it is necessary. (California Code of Regulations
Title 17 §50606)
FISCAL EFFECT: According to the April 25, 2016, Senate
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Appropriations Committee analysis, this bill may result in
ongoing costs of $110,000 per year for an additional auditor
position at DDS to review audit reports and report to the
Legislature (70% General Fund, 30% federal funds).
COMMENTS:
Developmental services: Developmental disabilities are
disabilities that originate before an individual attains 18
years of age and that are expected to continue indefinitely as a
substantial disability for that individual. Developmental
disabilities include intellectual disabilities, cerebral palsy,
epilepsy, and autism spectrum disorders, as well as those
disabling conditions similar to an intellectual disability that
require care and management similar to that required by
individuals with an intellectual disability.
Guidance for the delivery of services and supports to
Californians with developmental disabilities is found in the
Lanterman Act (WIC § 4500 et seq.). This Act entitles
individuals with developmental disabilities (often referred to
as "consumers") to treatment and habilitation services and
supports in the least restrictive environment; services are
designed to enable all consumers to live more independent and
productive lives in the community.
The developmental services system is administered by DDS and a
network of 21 regional centers across the state, which are
private nonprofit entities established pursuant to the Lanterman
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Act, that contract with DDS to carry out many of the state's
responsibilities under the Act. These 21 regional centers serve
over 300,000 consumers, providing services such as residential
placements, supported living services, respite care,
transportation, day treatment programs, work support programs,
and various social and therapeutic activities. Another
approximately 980 consumers live at one of California's three
Developmental Centers-and one state-operated, specialized
community facility-which provide 24-hour habilitation and
medical and social treatment services.
Individuals with developmental disabilities receive services
that are outlined in an individual program plan (IPP) which is
based on that individual's needs and choices and is developed by
an IPP team that includes, among other individuals, the
consumer, his or her legally authorized representative, and one
or more representatives from the regional center. The Lanterman
Act requires that the IPP promote community integration and
maximize opportunities for each consumer to develop
relationships, be part of community life, increase control over
his or her life, and acquire increasingly positive roles in the
community. The IPP must prioritize those services and supports
that allow minors to live with their families and adults to live
as independently as possible in the community.
Vendorization of community-based services: The 21 regional
centers receive an operations budget from DDS to carry out
activities related to eligibility determination and development
of IPPs. Regional centers also receive funds to purchase over
150 different types of services from vendors; services and
supports are aimed at supporting individuals to live in the
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community and can include in-home care, housing, transportation,
activity programs, and employment programs. (Regional centers
are the payer of last resort and therefore typically pay for
services only in instances where a consumer does not have
private health insurance or cannot be referred to "generic"
services; the majority of regional center consumers are enrolled
in Medi-Cal.)
"Vendorization" is the process by which service providers are
identified, selected, and utilized, based on qualifications and
requirements, to provide services to consumers. Through this
process, regional centers are able to verify that an applicant
vendor complies with all necessary requirements and regulations
prior to providing services; the regional center with the
catchment area in which the service is located vendors that
services provider. The vendoring regional center is then
responsible for verifying that the applicant vendor meets all
necessary licensing, and other, requirements; the regional
center will also determine the appropriate vendor category for
the service to be provided. If an applicant meets all necessary
requirements, a regional center is required to vendor that
applicant - however, this does not obligate the regional center
to purchase services from that vendor. Other regional centers
are also able to utilize the services of a provider vendored by
another regional center. There are currently over 44,000
vendors that provide services paid for by regional centers in
California.
Vendor audits and reviews: In August 2010, the California State
Auditor's Office released a report entitled, "Department of
Developmental Services: A More Uniform and Transparent
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Procurement and Rate-Setting Process Would Improve the
Cost-Effectiveness of Regional Centers." This report found,
among other things, that regional centers were not appropriately
monitoring expenditures of vendors and that they did not always
document why certain vendors were selected, how rates were set,
or how contracts were procured. This report brought about
heightened interest in oversight of vendor expenditures.
SB 74 (Senate Committee on Budget and Fiscal Review), Chapter 9,
Statutes of 2011, adopted, among other things, audit
requirements for regional center vendors. Those vendors
receiving between $250,000 and $499,999 in annual regional
center funding were required to obtain an independent audit or
independent review report of their financial statements for the
fiscal year, with some exceptions. Those vendors receiving
$500,000 or more annually did not have the option of submitting
to a less-stringent independent review and instead were required
to obtain an independent audit report. These new audit and
review requirements were envisioned to bring about savings
(approximately 1% of regional center purchase of service costs)
due to the identification, and correction of, poor billing
practices and inappropriate spending of regional center funds;
DDS also indicated that these new requirements enabled the
department to prioritize its own audits, focusing on those
vendors who had issues needing addressed.
Recent legislation - ABX2 1 (Thurmond), Chapter 3, Statutes of
2016 - changed some of these audit and review requirements. In
June 2015, the Governor convened a special legislative session
to address, among other things, funding rate increases for
community service providers of services for individuals with
developmental disabilities. One result of that special session
was the passage of ABX2 1, signed by the Governor on March 1 of
this year, which appropriated $287 million General Fund to
regional centers and community services providers in 2016-17 in
additional to leveraging an estimated $186 million in federal
funding. Among the changes adopted by this bill were changes to
vendor audit requirements. ABX2 1 raised the dollar thresholds
triggering reviews and audits, and removed the option for
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vendors in the lower tier to obtain independent audits, instead
only requiring independent review reports; now, those vendors
receiving between $500,000 and less than $2 million in annual
regional center funding are required to obtain an independent
review report, and those vendors receiving $2 million or more
annually must obtain an independent audit report (these vendors
are also now able to apply for a two-year exemption from the
audit requirement). The 2016-17 State Budget includes $1.0
million ($0.7 million of which is General Fund) to permanently
establish within DDS and retain funding for seven limited-term
auditor positions in the Vendor Audit Section.
While independent review reports are similar to audits, they are
substantially smaller in scope and do not result in an opinion
being issued; the purpose of the review is to analyze an
organization's financial data and gather information from its
management in order to express limited assurances that the
organization is in conformity with Generally Acceptable
Accounting Principles (GAAP). The review results in a Certified
Public Accountant either issuing a clean report or issuing no
report due to needed modifications.
Audit reports are completed by independent accounting
professionals in order to assess the financial status and
stability of an organization, and whether financial records have
been maintained in accordance with GAAP. An audit can result in
any one of the following opinions:
a) An unqualified opinion, also known as a "clean" or
"unmodified" opinion, is the best possible opinion to
receive as the result of an audit. It is issued when it
has been determined that an organization's financial
records are presented fairly and free of any
misrepresentations; this type of opinion also indicates
that the financial records have been maintained in
accordance with GAAP;
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b) A qualified opinion is issued when no misrepresentations
are identified, but an organization's financial records
have not been maintained in accordance with GAAP; this type
of opinion indicates the reason that the audit report is
not unqualified;
c) An adverse opinion is issued when it is determined that
the audited financial statements do not fairly represent
the organization's financial position and do not adhere to
the GAAP. Often, an auditor will work with the
organization to resolve or correct issues so the published
audit opinion can be either qualified or unqualified; or
d) A disclaimer of opinion is provided when an auditor
chooses not to issue an opinion, due to significant
uncertainties in the appropriateness of the materials,
significant limitations in the scope of the audit, or if
the auditor feels he or she cannot complete an impartial or
independent audit of the organization.
According to a survey conducted by the Association of Regional
Center Agencies (ARCA) in April 2015, an average of 52% of
vendors complied with audit requirements; of those complying,
99% had unqualified opinions. According to the sponsors of this
bill, financial review costs can range from $2,000 to $4,000,
while the cost for impacted vendors to have an audit conducted
is often between $6,000 and $14,000.
Need for this bill: According to the author, "[This bill] helps
address a primary concern about the SB 74 audit requirements-
they are a burdensome cost to vendors and are not an effective
way to identify fraud. Because the cost to perform audits and
financial reviews are borne by vendors and reducing fraud is
important, it is critical for the Legislature to understand if
the audits are accomplishing what they were intended to do or if
they are a waste of money. With [this bill], vendors can focus
on providing core services to those in need."
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ResCoalition, the sponsor of this bill, states that:
"The Department of Developmental Services (DDS) passed a
trailer bill as part of SB 74, labeled RC audits. In public
testimony, DDS indicated this was in an effort to remedy the
concerns of a Bureau of State Audits (BSA) audit of the
Regional Center (RC) system that found a number of
deficiencies. However the BSA audit was of RC's, not vendors
and there was no recommendation that vendors get audited.
Despite this, the measure passed with vendor audits included
and a new, costly and confusing audit process is burdening the
system with little or no redeeming value.
While we have been successful in making some changes via ABX2
1, significant concerns still exist. Some issues with the
above requirements include:
Thresholds do not meet industry standards;
Small vendors have been pushed into the next threshold
with just the minimum wage increase and/or the return of
the 4.25% temporary funding cut;
Ignores normal and typical business practices of small
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business, not accrual basis;
Consequences vary between each RC; and
Prohibitive costs to implement but no tangible outcomes.
[This bill] seeks to get the Department of Developmental
Services to assess the effectiveness of the continued mandate
for fiscal audits, considering the department has acknowledged
they have not achieved the intended or desired outcomes."
Opposition: Writing in opposition to the bill, DDS states the
following:
"[This bill] would require that a regional center submit to
DDS all service provider independent audit reports it receives
for DDS' analysis and determination of whether the audits are
effective in preventing fraud and improving service provider
accounting practices. The bill would require DDS to report
its findings to the Legislature twice per year. The
independent audits required by statute, however, are not
intended to detect fraud and the reports that DDS would be
required to review do not include sufficient information to
determine if the audits are effective in reducing fraud or
improving accounting practices.
An audit report is completed by an independent account
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professional to express an opinion on the financial statements
of a business or company. It considers a company's assets and
liabilities, and reviews whether financial records have been
maintained in accordance with General Accepted Accounting
Principles (GAAP). Independent audits test and evaluate
internal controls but are not designed to find or even prevent
fraud. Consequently, if the reported figures were apparently
correct, an independent auditor could issue a clean,
'Unqualified Audit Opinion,' despite the existence of fraud.
The scope of an independent review is substantially less than
that of an independent audit and can only provide 'limited
assurance,' and no opinion is expressed by the reviewer
regarding the financial statements. A review includes
primarily applying analytical procedures to management's
financial data and making inquiries of management; it does not
include review of supporting evidence or the evaluation of
internal controls.
The purpose of [this bill] is to enable the Legislature to
understand if audits are effective in reducing fraud and
improving account practices. Because of the nature of
independent audits, however, DDS would be unable to provide
the Legislature with the information needed to accomplish this
goal."
Staff comments: DDS is not able to track the impact of the
audit and review requirements on cost savings to the state, nor,
per the department's opposition to this bill, are the audits
able to be used to detect fraud. The limited scope of, and
benefits resulting from, these audits and reviews does raise
questions about their usefulness. However, this is not an
argument for completely eliminating what current transparency
and oversight do exist. Instead, the committee may wish to, as
discussions around rate-setting and rate methodologies continue
between the Legislature and the Administration, examine
approaches to improving audit standards for developmental
services in a way that enhances the usefulness of the results
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and transparency and efficiency of the developmental services
system.
Recommended amendments: DDS states that it is impossible to
detect fraud using the current audit reports, which were not
designed for this purpose. In order to ensure that reporting
responsibilities required of the department are achievable, and
to acquire a statewide picture of the compliance with audit
requirements and results of the audits and make this publicly
available via DDS's performance dashboard, committee staff
recommends the following amendments starting on line 34 of page
3 of the bill:
34
(2)A regional center shall submit copies of all independent
35
audit reports that it receives to the department for review. The
36
department shall compile data, by regional center, on vendor
compliance with audit requirements and opinions resulting from
audit reports and shall annually analyze the reports to
determine if they are
37
effective in preventing fraud and improving accounting practices
38
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among entities that receive payments from one or more regional
39
centers. The department shall biannually report publish these
data in the performance dashboard pursuant to Section 4572. its
findings to the
P4
1
Legislature. These reports shall be submitted pursuant to
Section
2
9795 of the Government Code.
In order to more readily identify vendors that must submit
review or audit reports, and to facilitate consistency in
submission of those reports, committee staff also recommends
amending the bill to: 1) specify that, as of January 1, 2018,
the amount of money a vendor receives from a regional center in
the state's, versus an entity's, fiscal year shall be used to
determine if a vendor needs to submit a review or audit report;
and 2) require, as of January 1, 2018, review and audit reports
to be submitted to the vendoring regional center within nine
months of the end of the state fiscal year, versus the end of
the entity's fiscal year.
PRIOR LEGISLATION:
ABX2 1 (Thurmond), Chapter 3, Statutes of 2016, among other
things, raised the dollar thresholds triggering reviews and
audits, respectively, and removed the option for vendors in the
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lower tier to obtain independent audits, instead only requiring
independent review reports.
SB 490 (Beall), 2015, would have increased audit and financial
review thresholds for regional center vendors. It was held on
the Assembly Appropriations Committee suspense file.
SB 74 (Committee on Budget and Fiscal Review) Chapter 9,
Statutes of 2011, established vendor audit and review
requirements, among other provisions.
REGISTERED SUPPORT / OPPOSITION:
Support
The ResCoalition, sponsor
The Alliance
Opposition
Department of Developmental Services (DDS)
Analysis Prepared by:Daphne Hunt / HUM. S. / (916)
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319-2089